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Money matters and financial services
Special
Manage your price risk exposure
to volatile diesel prices
S
ince its inception in 2014, the JSE
Diesel Hedge has experienced a
steady increase in market participa-
tion with last month seeing a new
record total number of contracts traded,
with just over 28 million litres. These vol-
umes are a clear indication of the increas-
ing need for a price risk management tool
of this kind.
With so much volatility on energy prices,
the contracts give businesses the oppor-
tunity to lock in their margins, regardless
of movements in the price of diesel. That
is essentially the objective and use of this
contract.
In simple terms, a Diesel Hedge is a type of
derivative in which the underlying traded
product references a foreign underlying
currency, but the instrument itself is settled
in rands per litre. This contract gives you
exposure to an efficient hedge for the local
diesel pump prices by tracking an interna-
tional reference market.
The contracts are traded in rands per litre,
with each contract representing 5 000 litres
of diesel. The agricultural, mining, logistics
and transport sectors in particular will ben-
efit from these contracts.
Any company that uses a lot of diesel in
the course of their work will find these con-
tracts to be very useful and cost effective.
The contracts will help reduce risk by pro-
viding a hedge through following the price
of European gasoil, as traded on the New
York Mercantile Exchange (NYME X).
Gasoil is a refined crude oil product and
is close to diesel in the refinery process.
These contracts provide investors with a
hedge against movements of the price of
diesel refined in Europe, but this price also
plays a big role in what we pay for diesel in
South Africa.
Mining companies and producers could
be using call options to lock in the price. If
the oil price is going through the roof, they
will be able to say: ‘That is the maximum I
will pay’. On the other hand, importers and
refiners in the country who may be con-
cerned that the diesel price is going to fall
could lock in the price at the higher level.
If they think prices are going to go down and
that pump prices will reduce, they can de-
cide to sell the futures contract and lock in
a profit. Investors have the option of buying
as many contracts as they need since the
JSE contract taps into the deep and liquid
international markets. Another example to
further spread out your hedged price is that
you can buy one contract for the next ten
days to secure a more representative aver-
age hedge price.
In terms of how the cash settlement of
these contracts work: The South African
wholesale diesel price is made up of taxes
and levies as well as the basic fuel price
(BFP) of diesel. The BFP (free on board) is
benchmarked of international energy pric-
es, which are quoted in dollars, and so the
dollar/rand exchange rate is also a factor to
consider.
European gasoil is therefore a proxy for the
basket of international energy prices used
to calculate the South African diesel price.
The JSE’s futures and options combine this
price with the current dollar/rand exchange
rate resulting in the JSE futures price
being strongly correlated with the local BFP
diesel price and so providing an excellent
way to manage risk.
The final cash settlement price of the diesel
contracts is calculated on the monthly av-
erage exchange rate and European gasoil
prices in the month before the contract ex-
pires. Our core objective as the derivatives
market at the JSE is to provide our country
with effective and diverse price risk man-
agement tools that can be used in all areas
of business.
For more information or to start hedging,
register as a client with a JSE approved
derivatives member. Alternatively visit the
JSE’s website for contract specifications.
27
May 2016
Product information
CHRIS STURGESS,
director of Commodity Derivatives: JSE
Graph 1: Diesel price movements as at December 2015.